FASB nears proposal on crypto assets measured at fair value

Sean C. Prince, Nicholas G. Topoll
| 12/16/2022
FASB nears proposal on crypto assets measured at fair value

The FASB is moving closer to issuing a proposal to require certain crypto assets be measured at fair value.

In under a minute

  • On Dec. 14, 2022, the Financial Accounting Standards Board (FASB) tentatively decided that an entity with holdings of crypto assets that are measured at fair value – for example, bitcoin and ether – should record changes in fair value through net income. The FASB also concluded holdings of crypto assets should be presented separately from other intangible assets on the balance sheet and changes in fair value of crypto assets should be presented separately in the income statement. Separate disclosure requirements also would apply to crypto assets.
  • The FASB’s latest decisions follow on the heels of its October 2022 meeting where the FASB concluded entities with holdings of crypto assets in the scope of the project should be measured at fair value at each reporting period determined using the principles in Topic 820, “Fair Value Measurements.”
  • In an August 2022 meeting, the FASB concluded the scope of its project would focus on fungible crypto assets and crypto assets that don’t convey a right to a good or service, ruling out the use of fair value for non-fungible tokens (NFTs) and utility tokens.
  • The FASB plans to meet in early 2023 to discuss transition provisions and scope refinements, after which it will issue an exposure draft for public comment.
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Background

Under existing U.S. GAAP, many digital assets (for example, holdings of bitcoin and ether) are accounted for as indefinite-lived intangible assets under Topic 350, “Intangible Assets.” Both user and preparer stakeholders have expressed concern to the FASB that an intangible asset accounting model in which digital assets are measured at historical cost less impairment does not faithfully represent the economics of such holdings. Many of these same stakeholders requested the FASB to consider whether all or some subset of digital assets should be accounted for at fair value.

In response to stakeholder feedback, in May 2022, the FASB added a project to its agenda to consider whether a certain subset of digital assets should be measured at fair value.

Scope of the FASB’s project

At its Aug. 31, 2022, board meeting, the FASB tentatively identified the scope of its project to include crypto assets held by an entity that possess all the following characteristics. Such assets must:

  • Meet the definition of “intangible asset” as defined in the Codification Master Glossary
  • Not provide the asset holder with enforceable rights to, or claims on, underlying goods, services, or other assets
  • Be created or reside on a distributed ledger or blockchain
  • Be secured through cryptography
  • Be fungible

Crowe observation: The project’s scope includes holdings of some of the most actively traded crypto assets, such as bitcoin and ether. On the other hand, it does not include other popular digital assets such as 1) NFTs, 2) utility tokens that provide the holder thereof with rights to goods or services, and 3) stablecoins that meet the definition of a financial instrument. Entities with digital assets outside the scope of the FASB’s project will continue to need to apply judgment to determine the proper accounting treatment for such assets.

Fair value measurement

On Oct. 12, 2022, the FASB tentatively decided that crypto assets within the scope of its project should be measured at fair value at each reporting period, and on Dec. 14, 2022, the FASB determined changes in fair value should be recorded through net income.

The board considered whether it should provide application guidance for determining the fair value measurement of crypto assets (for example, how to determine the principal market, how to determine leveling within the fair value hierarchy, and what to do if markets are inactive) but ultimately decided not to.

Crowe observation: While it considered making the fair value measurement of in-scope crypto assets optional, the FASB ultimately concluded crypto assets within the scope of the project should be required to be measured at fair value. Board members commented that fair value measurement better reflects the economics of crypto asset holdings within the scope of the project. Additionally, a fair value option could potentially result in a lack of comparability.

Presentation and disclosure

On Dec. 14, 2022, the FASB reached tentative decisions on presentation and disclosure requirements for crypto assets within the project’s scope.

Presentation

The FASB tentatively decided crypto assets within the scope of the project should be presented separately from other intangible assets on the balance sheet. The primary rationale for separate presentation was the difference in measurement bases between crypto assets within the scope of the project (fair value) and other intangible assets (cost less impairment). The FASB also concluded changes in the fair value of crypto assets should be presented separately in the income statement from changes in value (for example, impairment and amortization) of other intangible assets.

With respect to the statement of cash flows, the FASB tentatively decided to include application guidance in its forthcoming proposal to help entities determine the appropriate cash flow classification. Specifically, the proposal would require entities to classify crypto assets received as noncash consideration during the ordinary course of business that are converted nearly immediately into cash within operating cash flows.

Crowe observation: One board member provided an example of an entity that accepts crypto assets as a form of payment in a revenue transaction and has a policy of immediately converting the crypto assets into cash. In this example, the board member supported classification of the cash flows received from the sale of those crypto assets as operating. The majority of the board members agreed with that view and agreed to propose clarifying language to Topic 230, “Statement of Cash Flows.” On the other hand, many companies hold crypto assets for the purposes of price appreciation; in such circumstances, an investing cash flow classification would be more appropriate.

The proposed presentation requirements would apply to both public and private companies. The board also tentatively decided investment companies and not-for-profit entities would present their financial statements in accordance with the presentation requirements in Topic 946, “Financial Services – Investment Companies,” and Topic 958, “Not-for-Profit Entities,” respectively, subject to minor revisions clarifying the inclusion of crypto assets.

Disclosure

With respect to disclosure, the FASB tentatively decided reporting entities should disclose:

  • The information required by Topic 820 for crypto assets measured at fair value
  • The line item in the balance sheet where crypto assets are presented if not presented separately
  • The name, cost basis, fair value, and number of units of each significant crypto asset held
  • How the cost basis of crypto asset holdings is determined (for example, specific identification)
  • The nature and remaining duration of any restrictions that apply to crypto asset holdings, such as a contractual sale restriction (for example, a lockup period), and the circumstances that would lift the restrictions
  • A reconciliation of activity between the beginning and end of the period for total crypto asset holdings, including the amount of current-period additions, dispositions, and gains and losses (realized gains and losses would be presented on a gross basis)

All the disclosures would be required on both an annual and interim basis, except for the reconciliation of activity information, which would be required only annually. The FASB also decided the disclosure requirements would be broadly applicable, with no exception for entities applying specialized industry guidance (for example, investment companies).

Crowe observation: The board debated the utility of the reconciliation of crypto asset activity disclosure. Several board members questioned the incremental benefit of the rollforward but ultimately decided to include the requirement in the upcoming exposure draft to seek feedback from stakeholders. The FASB decided not to require several other disclosures, including an entity’s purpose for holding crypto assets, information about who holds the related private key, and the timing of pricing information used to measure fair value (for example, time zone information).

Next steps

The FASB plans to hold a board meeting in early 2023 to discuss certain refinements to the scope of the project and transition guidance. An exposure draft for public comment is expected in early 2023.

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Sean Prince
Sean C. Prince
Partner
Nic Topoll
Nicholas G. Topoll